Hysan Development Company Limited (0014.HK) Earnings Call Transcript & Summary

Good afternoon. Thank you all for coming to Hysan Development's 2024 Interim Results Announcement Analyst briefing session. Let me introduce our panel for this afternoon, our Chairman, Ms. Irene Lee, our Executive Director and COO, Mr. Ricky Lui, our CFO, Mr. Andy Choi. We will start with the presentation from Irene, Ricky and Andy. And we will follow that to take questions. Now I would invite Irene to start first. Irene, please.

Welcome to the analyst briefing of Hysan's 2024 interim results. Hysan continued to leverage the strength of our core businesses and contributions from our strategic pillars in the first half of 2024. As retail and office trends evolve, we are reinventing our offerings, starting with the rejuvenation of Lee Gardens precinct that began 2 years ago. And we are now seeing the results. We have been receiving long-term support from our Club Avenue members, serving multi-generations of old and new Hong Kong. Compared with the peak of the retail market in 2018, there has been a 40% increase in our Club Avenue members spending at Lee Gardens, despite the pandemic. To enhance the shopping experience for customers, we have strengthened collaboration with our anchor tenants and started rejuvenation of the Lee Gardens 2 years ago, marking a key milestone in our journey of transformation. The rejuvenation of Lee Gardens includes the expansion of major luxury brand flagship stores. Slated for gradual completion, the rejuvenated Lee Garden One, Two, Three and Five will welcome more than 10 newly renovated and expanded Maison flagships. Lee Gardens will be firmly established as the home of luxury brands, a new absolute attraction for both locals and visitors. The completion of rejuvenation will double our luxury portfolio. Each luxury flagship will showcase its latest and best offering designed for Lee Gardens. This will be a full -- there will also be a full and -- fuller, actually, range of F&B and much more diversity in shopping experience at our Lee Gardens. With the reshaping of Hong Kong's retail landscape, industry players must innovate and deliver a more engaging experience that resonates with the consumers changing preferences. We have -- had 100 years of working with and curating for our community. Today, we attract over 100,000 daily traffic to the Lee Gardens area, old and new Hong Kong, young and old, are here to experience our diverse choices. Hot after the launch of the first indoor skateboard park at Hysan Place, our #URBANHOOD concept made its debut last Christmas, along with more than 200 local and international brands and over 100 marketing events held annually, we are well positioned as a trendsetter of urban culture. The Caroline Hill Road development, we will now call Lee Garden Eight, is on track for completion in 2026. It is another strategic move to reinforce our leading position in the area. An integrated pedestrian walkway system will also be in place in 2026, connecting the Lee Gardens area from Caroline Hill Road to the Causeway Bay MTR station, which is under Hysan Place, within an 8-minute walk for more seamless working, shopping, dining and leisure experience. This provides an added option to the walkable neighborhood which we're so proud of at street level or via air conditioned all-weather walkways. Lee Garden is a crucial part of our Lee Gardens rejuvenation. As premium Grade A commercial mixed-use buildings, the project adds a notable lifestyle element through the inclusion of a significant green community space. It features cutting-edge, sustainability design, efficient floor plates, a 60,000 square foot lifestyle park, I call it an urban oasis, and the performing arts and cultural center designed to meet the evolving needs of corporate and commercial tenants. So in addition to our core business, we have established strategic pillars as new engines of growth to complement our core operations. Investment in these pillars have started to contribute. Lee Gardens Shanghai made good progress, securing commitments for 70% of our office space by the end of the period, with quality tenants spanning across the reputable financial institutions, luxury retailers and professional firms. The use of workspace and indeed, the very concept of an office has been evolving even before the pandemic, Hysan identified flexible workspace as a fast-growing business segment that complements our traditional office portfolio many years ago. It is simply an essential part of the office ecosystem. We entered into a joint venture with IWG, a long-established global brand that is one of the most successful flex operators in the world. The flex office sector in the Greater Bay Area includes Hong Kong, achieved steady growth and maintain high occupancy. Growing demand for flexible office solutions, which is now an integral part of the office ecosystem, accelerated the performance of our joint venture, IWG. We are optimistic and confident about the flex business in the Greater Bay Area. We were early in identifying market demands and took the lead to define and formulate our strategy for the new normal as early as the beginning of the pandemic in 2020. We did not stop during the pandemic. During '21 to '23, instead, we actively executed our plans to secure opportunities and long-term partnerships. Now we are in 2024. We are beginning our harvest. So we are beginning to see results with Lee Gardens rejuvenation completing in stages and investments in strategic pillars also starting to contribute. This includes what we've just seen, the Lee Garden Shanghai and our GBA Flex business. Looking ahead for the next 2 years, '25 and '26, we will be seeing the completion of Lee Garden Eight, the integrated pedestrian walkway system and the rejuvenation of Lee Gardens, while our strategic pillars will be more mature, leading to diversified revenue streams. Lee Gardens will continue to be a destination where people come to work, live, enjoy now and for generations to come. This is our strength, generations. I will now ask Ricky to share with you more about Hysan business and operations for the first half of 2024.

Thank you, Chairman. Good afternoon. Now I try to share some of our interim results. For the revenue, the first half of 2024 is HKD 1.69 billion, which represents 5% growth year-on-year. The period-end occupancy for retail 95%, office 89% and residential of 68%. Our retail revenue up for 10.8% is contributed by reopening of rejuvenated area and positive rental reversion. Office revenue, down by 2.8%. The rental pressure prevail, with the diversified tenant mix and the proactive restructuring for early renewal negotiations and broaden up our source of new tenants it helped to retain a stable occupancy. Residential revenue and occupancy recovering, and Lee Gardens Shanghai start to contribute. On retail, the Lee Gardens rejuvenation starting to bring results. This transformed and expanded luxury flagships, along with -- along the Hysan Avenue together with the exciting #URBANHOOD concept in Hysan Place and the nearby low-rise area were launched in the first half of 2024. This expands our portfolio's width and breadth with 50-plus new brands opened within the last year. Further key opening will continue to be launched in the next 12 months, sustaining the momentum and as well as providing the diverse and ever-evolving customer experience for the customers. For retail sales is in line with the Hong Kong retail sales performance, our tenant sales also faced pressure from change in consumption patterns and strong Hong Kong dollars. When we come to our loyalty program, which is a very strong pillar of our retail business. As Chairman has mentioned, the members spending versus the 2018, which is almost the peak of the retail sales is up by 38%. And the contribution to our total retail sales is up by 13%. About the top-tier members, the average spending is HKD 1.6 million per member. But we don't just focus on our high tier members. We believe a more balanced contribution across all tiers is important to form a more strong base and the needed resales of the memberships. Recently, together with the relaunch of our Lee Gardens apps, we have we have generated our second membership called Hy! Membership. This is for a wider demographic spanning generation and both established for both Hong Kong resident locals as well as some visitors. We get a quite encouraging results by getting over 60,000 members within 6 weeks after launching the membership, is now contribute additional 20% of the members' spending on top of the Club Avenue. The unique positioning of Lee Gardens that support the resilient occupancy of office. We have put in continuous effort to diversify our tenant mix as well retain our key tenants. As I have mentioned, our team has been proactive in all the lease renewal as well as develop new customer resources. When we -- if you look at the high chart on the right-hand side, it tells what it means about the balance and diversified tenants portfolio. The 7 categories already -- which is quite evenly distributed. If we further divide it -- divide the banking, wealth management and finance into another 2 categories, you will see that 8 categories will take up about 80% of our tenants mix. And each of them is about around 10%. So this really tells the attractiveness of Lee Gardens is very broad, and it can cover some new coming technology, education, services to traditional banking and finance. And the new coming co-working sectors that been empowered by our investment in IWG has really make the whole portfolio, a full-range offering for office solutions. We talk about events, which, in a way, not only about providing traffic for retail, it's also about building the characters of the whole community, for both office and retail. We have over 100 events each year. But there's one that I want to mention today is about this Urban Jam that we hold about 3 months ago. This is an event collaborate with the Hong Kong government, trying to boost Hong Kong economy. We make use of this collaboration to showcase the operation capability and the uniqueness of the area. Within 5 days, we spread over to weekend, we've generated over 600,000 traffic to the area. And it also received very positive response from the market, from the government, and we were also invited to do more collaboration with them over the time. So this is what I want to introduce today. Andy, may I pass it to on the financials?

Okay. Well, before we move on to the Q&A, which everyone is looking forward to, just a quick recap on the financial numbers. So on the key metrics, shareholders' fund stood at HKD 66.8 billion, which is largely stable from the previous year-end. And NAV per share is at HKD 65 and the Board has proposed to keep the first interim dividend flat at HKD 0.27. Okay. And on capital management, again, the group has a very strong liquidity and cash flow position and our cash as of the reporting day is around HKD 3 billion. We, together with the undrawn committed facility, we have HKD 14 billion of liquidity resources as of the reporting date. And we also signed a syndication loan with 20 banks in July. This provides us additional buffer in liquidity and which will help us to strengthen our capital base. So a bit of the key financial metrics. I'm sure everyone is familiar with it, so I won't dive into the details. Just one key look, we will continue our principle of prudent capital management. As mentioned before, all the major project CapEx have been secured and provided for. So we are moving into a harvesting phase with LG rejuvenation starting to come into contribution and also the Lee Garden Eight project coming in 2 years' time. So I think that presume -- summarize our capital management and outlook.

So to conclude, if I seek your indulgence, I'm leveraging on the history book of the family that was recently launched. [Foreign Language] for our Chinese friends here. With a long-standing legacy spending -- spanning 100 years, Hysan has been an integral part of Hong Kong's growth story and a major contributor to its prosperity. My grandfather bought Lee Garden Hill 100 years ago. After generations of efforts, we just kept going, it was eventually developed into one of the primest locations in Hong Kong. This shows commitment and conviction. Hysan has demonstrated continuous reinventions and creativity in how it curates the place with contrast and diversity. We believe in that. We believe in inclusion because we are a community operator. The Lee Gardens precinct leads as a trendy, vibrant and up market integrated shopping and commercial neighborhood in Hong Kong, and that has been a result of our strong and disciplined execution driven by our unwavering vision. As we remain prudent steering our way through the ongoing market complexities, we are confident that our multipronged development and enhancement will not only future-proof our portfolio but will open a new chapter in our growth story, which will reinforce and sustain our long-term prospects. Looking ahead with optimism and determination, we will continue to shape the future of Lee Gardens and contribute to the sustainable development of Hong Kong. Thank you.

[Operator Instructions]

First of all, congratulations on the results. This is Mark Leung from UBS. I got maybe 2 or 3 questions. I think, first of all, is -- really appreciate that you maintained -- the dividend remain constant. I recorded, Irene, previously, you mentioned we have a steady and progressive dividend policy, not sure if you would still like to reiterate the statements. I think that's my first question. And second question, I think, is more on Andy side. So I think, is there any bank covenants or bond covenants or metrics we need to keep an eye on in order to maintain the credit rating or bank refinancing, et cetera? And lastly, I think it's more on the Lee Garden Eight. I saw we got a pretty balanced tenants portfolio for office. But what is your ideal tenant mix for Lee Garden Eight?

So maybe I will answer the dividend question and Andy will answer the metrics and Ricky can talk a little bit about the Lee Garden Eight. Thank you for your questions. Dividend. Yes, we always have our shareholders -- our stakeholders' interest. First, the primest consideration. And of course, we always have to consider the company's own development in terms of our operating performance, our CapEx commitment and our long-term business growth. So these are the capital management that we have to look at and juggle with. We remain cautiously optimistic. The Board is committed to our long, long-term commitment to provide a stable income for our shareholders. But of course, we have to be prudent and we have to be sensible. So without having to commit to anything, Mark, I think the key is we will be prudent. We have committed to and have executed our rejuvenation of developments. So as Andy said, our CapEx has been committed. It has been, and we have plenty of liquidity. So in terms of financial -- prudent financial management, I think we feel very comfortable with that.

Thank you for the questions. As to the covenant, I think what -- apart from those customary undertakings, one of the key covenants definitely would be the gearing ratio. It depends on how you calculate it. Our gearing ratio is around 1/3 at the moment. So I think that's -- of course, each loan has different gearing ratio, we still have a very comfortable buffer, I would say. So there is no major hurdle in refinancing those steps in terms of covenants.

Lee Garden Eight, Ricky?

About Lee Garden Eight , I just -- we talk about our balanced portfolio. With such a big development, of course, the first thing we want to do is to find the anchor. And if you look at the balanced portfolio from financial institution wealth management, medical and health, all this become a fairly natural target for Hysan because the popularity within the existing portfolio means that this is a good place for them to stay. And it will be a good testimonial for other similar trade headquarter to be situated at Lee Gardens. So for Lee Garden Eight, so I think that really tells the direction that we are heading to.

I think I might add a little bit. You have to differentiate because there is supply and demand is not pushing the door down. So we feel very, very strongly that we are differentiated because nobody has this bulk, nobody has a curated community, which offers the widest. I mean, I challenge anyone to not want to be in the Lee Gardens area. Because you have everything [indiscernible], right, everything that you want to do in your daily life and more for your family later on. And also with our greener, with our urban oasis, I don't know that you can find a place which has so much greenery around you. And I think that is really important for wellness. Our floor plate will probably be the most efficient in Hong Kong. Because we have 2 buildings, which can be joined together or it can be split into 2 or it can be split into 4. Of course, the most efficient. And what I would like is to have people take my whole floor, and that's 30,000 square feet -- a 40,000 square foot, quite big. But you can imagine the efficiency. It will sit on the most amazing retail F&B platform. It's not the hugest part. The retail is only about 15% or so of our overall development of LG Eight. And don't forget the convenience. It is just with the walkway 8 minutes to Hysan Place MTR, plus we will have some minibus relocated. And our curation for people for the bus stop will be -- will not be the normal bus stop you see. So it's very thoughtful. It really will attract. So when I sell to potential tenants, I'll challenge them, ask your staff, who wants to be here. It's very important, particularly now that people seem to have a choice to work at home. So I would like to make sure that your staff are happy. We always have the same thing. When Goldman Sachs came, when KPMG came, they don't dare bring their staff from somewhere else to come because they feel that they are disadvantaged because they want to be here. So I think you have to create a place where people want to be here. We all know the office sentiment these days. You have to convince staff to come to work. That's a bit new for my generation, but that is really important to have a place where people want to be at Lee Gardens.

Irene, Ricky and Andy, I'm Fan Tso from Bank of America. A couple of questions on your retail portfolio. First of all, can you let us know your latest occupancy cost. And based on your lease negotiation with your tenants, are you confident that base rent reversion will be predominantly positive for the rest of the year? And secondly, if you can break it down the performance of your 3 retail hub, that will be great. And lastly, we saw that the Hong Kong retail sales actually weakened in the second quarter, mainly from the luxury items. And that coincides with a depreciating Japanese yen. So when you talk to your VIC clients, do you have a feel that currency is the major reason? Or is there any genuine more cautious spending?

I might get Andy to answer some of the technical stuff, and later I'll give some color.

Sure. Thank you very much for the questions. So in terms of occupancy cost ratio, yes, because our tenants are in line with Hong Kong retail sales, those as a bit of a weakened in the first half. Our occupancy cost ratio is around high teens percentage. That's comparable to previous year, I'd say. So in terms of rental reversion, of course, we have seen a positive rental reversion for the first half of the year. There's a range of it, probably about mid-single digit to low teens range. In terms of -- yes, there's a different performance between those hubs. But I think more characterize is the -- actually the impact of our rejuvenation project. I would say majority of the rental improvement come from the open space, which we have enhanced the offering and create a new tenant mix for them.

Two words on the rejuvenated space. Right now, we are looking at the luxury boulevard, the Hysan Avenue Boulevard. When we decided to press the button on the rejuvenation, basically, it was a top-down and bottom-up approach. So every single deal has to make sense and our numbers were very, very solidly and conservatively calculated because it's a long-term generational change. So in terms of making sure that we don't go naked, right? We actually have our anchor tenants committed and we can actually calculate the uplift on the rent. And on the -- so I'm very keen on productivity per square foot. I look at that very, very keenly. And of course, we always make sure our clients don't just calculate if they are doing HKD 2 per square foot, and they now have 2 square feet. It's actually not HKD 4 per square foot, it has to actually optimize because of the halo effect -- of their own bigger and better store and then the next store and the rest of the area. So I think we feel very, very confident that -- and that is a very large part of our business, of course, the luxury sector. But of course, we work very hard to ensure that we maximize, optimize the spending for our beautifully rejuvenated space. But at the same time, we keep an eye on, if you can look at Hysan Place, we have not stopped recurating Hysan Place. Hysan Place for it to be at the forefront of trendiness, you have to constantly change. And you have to make some courageous decisions. I mean, for instance, our skateboard park, I think, is a little bit courageous, but it's actually become a landmark for Hong Kong. And then, of course, you have to follow through. If you put Level 4 skateboard park, you need to have other related trades and F&B, so that it becomes a destination because with vertical transportation, you need to actually drive people there, it has to be a reason to go from Level 2 to Level 6. People don't just go on escalator and just wander around. So I think you have to accept, you have to be inventive, you have to be brave and you really need to use your imagination. So I think we do that quite well. We're very, very conscious on behavior. We're very conscious to make sure we understand what people want. People want a story. People want purpose. People want excitement. People want change. So that means a little bit more pop ups, pop ups are real pain because it's a lot of work. But that refreshes. And that actually allows us to try new ideas and if they don't work, we push them out if they -- so on. So I think it's very, very dynamic. It's -- so again, every time I think about that, I think about my team, it must be hard work.

Congratulations on the result. I'm just curious if you've got any comments on construction costs for Lee Garden Eight, if there's been any changes there. You kind of touched on it earlier, but just what you're seeing. Second, I'd be interested in the timing of the income from that 70% precommitment that you've got in Shanghai, and I guess, as we think about the dividend? And then also then with the CapEx, just when we should expect the gearing to peak?

Okay, can you talk about Shanghai contribution and Andy on the gearing and the CapEx.

Yes. I think the good thing is that we're -- most of the contracts has been awarded. And this is within our budget and we got some later saving as a buffer for the coming construction period. And then timing-wise, we are -- as you know, that we are using the top-down method. So basically is -- even with rainy days recently, we are really on time, on track. So today, Irene has just mentioned about completion by mid of 2026 is still our target and which we don't really see, but any deviation from it for now.

We're very committed, [ Sarah ], to completing on time, if not ahead of time because every day, and that's our mantra. Every day, it costs us x dollars and we talk -- we shot that out every day. So we have to remind people, every day cost us more, and it squeezes my margin.

And Shanghai basically, the order commitment will start at least by the end of the year. And also, we haven't mentioned about our retail. As said today, our retail which are released -- start leasing about a few months ago. Now we have about a commitment rate above 50%, and we will do our soft launch around September or to October. And we hope by the end of this year, we hope that we can get, say 70% of the commitment rate as well.

In a challenging market, yes.

As for gearing, majority of the group's gearing is incurred for the CHR project actually. So I think the gearing goes up as we deploy more CapEx. So that will be pretty much in line with the completion timing of Caroline Hill Road project...

So, it will be peaking in...

Peaking in 2026 and '27. Yes.

Due to the time constraint, we will take one question online platform. It is from Simon from Goldman. He is asking for the preleasing status of the current -- of the Caroline Hill project, and would like the management to share some color on that.

We are in discussions. This is still early days. We have target demographics in terms of our -- of course, we are focusing on our office first. Because that is the majority and probably the harder. So both retail and office, we are circling what areas of interest and what clients within those areas of interest. So it's early days, and we will report what we can.

Thank you, management. Today's briefing session is completed. And we sincerely invite all of you to enjoy our Lee Gardens.

No one can leave without shopping at our new [ Hermès ] and [indiscernible] stores. I will keep track of all of you. And Kevin, look at your Club Avenue status.

Yes. Yes.

Thank you. Thank you very much.

Thank you very much.

Thank you.